Eurozone’s politicians got austerity wrong

austerity EU

The harsh austerity measures that, according to official policy, are supposed to overcome the euro crisis have once again plunged Europe into recession in 2012. Austerity policy has turned to be–in Greece, Italy, Portugal and Spain (GIPS)–primarily an attack on wages, social services and public ownership.

The analysis of Busch/Hermann/Hinrichs/Schulten shows in section 2 that , in the course of the Euro-crisis, the EU has developed a new form of wage policy interventionism–Euro Plus Pact, Six Pack–which has led to far-reaching interference in the collective bargaining systems of the GIPS states. The principles of central collective agreements and universal applicability have been undermined and collective bargaining systems have been decentralised. Thus the GIPS states are launching processes of change in their collective bargaining systems that were completed long ago in many other EU states.

In the public sector, as a result of the austerity policy, wages have been frozen or cut. Greece (–20 per cent) and Portugal (–10 per cent) have been at the forefront of cuts in real wages throughout the economy. Spain (–5.9 per cent) and Italy (–2.6 per cent) have also experienced above-average real wage losses (see Figure 4) during this period. This represents an opening of the floodgates in comparison to the situation before the crisis of 2008/2009.

In pension policy, Portugal introduced reforms in 2007 and Greece, Italy and Spain in 2010, which many other EU states had launched a decade previously. Besides a raising of the statutory retirement age, the equalisation of men and women, a toughening of the conditions for early retirement and the abolition of job-specific differences, individual components of pension reform–increase in the number of insurance years for standard pensions, changes in indexation methods–have been adjusted in such a way that the rise in pension costs in relation to GDP by 2040 has been slowed down significantly. Relative pension levels–measured in terms of wage replacement rates–will fall drastically in the GIPS states by 2040.

The pension reforms that have been implemented will have long-term negative consequences, especially for the incomes of those future pensioner generations who have more unfavourable employment biographies. Longer periods of unemployment and so-called »atypical« employment conditions entail gaps in social insurance contributions and thus lower pension levels.

Privatisation policy has taken on new impetus in the GIPS states because of the Euro-crisis and the accompanying austerity policy. In Greece and Portugal, the granting of loans by the EU states was linked to extensive privatisation. Spain and Italy, under pressure from the ECB and international institutions, have announced far-reaching privatisations. Among the GIPS states, Greece has been most affected and plans a veritable fire sale of state property.

Regarding the European Social Model the authors draw the following consequences out of their analysis. The weakening of the social flank in Southern Europe in fact has repercussions for western and Eastern Europe, putting the trade unions and left-wing parties under further pressure. In the market states system wage and social dumping processes are thus even more pronounced. This is not a linear process, in which »the South« catches up with the reforms that »the West« and »the East« have often already implemented. The above mentioned interventions in Southern Europe mean that the liberalisation of the European Social Model will be implemented in the EU as a whole. If the path of economic austerity, despite all opposition, is maintained until 2014/2015 and then experiences a new economic upswing the policy disaster for European social democracy and the trade unions will be complete.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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